German court rules foreign family foundation taxation contrary to EU law

Germany's Federal Fiscal Court (BFH) ruled on December 3, 2024, that the attribution taxation of foreign family foundations, as stipulated by Section 15 (1) of the German Foreign Tax Act (AStG), is contrary to European Union law. This decision significantly impacts individuals who are tax residents in Germany but have connections to foreign foundations.

The attribution taxation mechanism was designed to prevent tax evasion and capital flight by attributing the assets and income of foreign foundations to their founders or beneficiaries who are liable for tax in Germany. Previously, an exemption under Section 15 (6) AStG applied if the foundation was based in an EU or EEA member state and met specific conditions regarding control and information exchange.

In the case at hand, concerning a Swiss family foundation, the BFH found that even though the conditions for attribution taxation were met, it could not be applied due to the EU law principle of free movement of capital. The court reasoned that denying the exemption to foundations in third countries, like Switzerland, would deter individuals from establishing foundations abroad.

The BFH also clarified that the assessment of whether foundation assets are legally and factually beyond the disposal of beneficiaries hinges on civil law. In this instance, the German-resident beneficiaries lacked direct control over the foundation's board or enforceable claims. The ruling also extends to trusts, potentially easing tax uncertainties for individuals relocating to Germany with trust assets from common law jurisdictions.